Insurance Planning: Take Shelter from the Unexpected

Physician's Money Digest, April15 2005, Volume 12, Issue 7

There is precious little in life that can be considereda sure thing. For the most part, life is aseries of gambles and calculated risks. We takecertain risks because of the potential forrewards. If we're wise, we weigh risk vs reward to gaugewhich is the best road to travel.

An individual who goes to Las Vegas or Atlantic Citywith $1000 in their pocket might not feel any sense ofloss if every penny of that thousand dollars was gone bythe time they returned home. It was money set aside forthat specific purpose, and the determination had beenmade that the potential for reward was worth the risk.In addition, no one was hurt in the process.

When it comes to gambling from an insurance perspective,such as not having the proper insurance coverage,do you really want to put your faith in chance?There's a lot that can be lost, many individuals can gethurt in the process, and there is very little reward.

In short, failing to adequately protect yourself andyour family with various types of insurance coverage canbe like walking a high wire without a net. The risk ishigh and the rewards, if any, are minimal.

Life Insurance Considerations

Life insurance products are becoming more andmore sophisticated, designed to meet a wide range ofneeds at different life stages. At the base level, youngerphysicians typically gravitate toward lower-cost terminsurance, loading up at fairly high limits of benefit. Thepurpose here is to cover the costs of a college educationfor their children or to enable their spouse to finish payingthe mortgage on their home. In many cases, a 15-or20-year fixed term policy might be worth considering.

However, as physicians age into their 40s and beginto build their estate, their perspective changes. "What'shappening is more people are realizing the importanceof estate preservation,"explains Bob Muenzberg, vicepresident of sales for the Massachusetts-basedMcGrath-Burnham Group. "They begin to gravitate tosome type of whole life, variable life, or universal lifeinsurance product. These have a real cash value and areal permanence to them, so that when the time comes,there's a fund available to pay estate taxes."

Most physicians recognize the importance of lifeinsurance. Determining how much life insurance coverageto carry is another matter. Stephen Powell, ChFC,RFC, RFP, a financial professional with MONY LifeInsurance Company, says the key is to plan.

"We go through a full analysis or financial plan,"Powell explains. "Instead of just paying off debt for apractice or an individual debt, it can be used as incomereplacement. There are also charitable bequests. Theplanning process tends to help people focus on theamount of coverage they need, the type of coverage theyneed, and the duration they need it for."

An increasingly popular type of life insurance productis a last survivor policy, particularly for universal lifeinsurance. The name, as it implies, insures two people,typically a husband and wife. Patrick Smith of HartfordLife says the product has become especially attractive forwealth transfer purposes.

"The reason it is very attractive is that it is often atthe death of the second spouse when tax bills come dueand payable,"Smith says. "Significant wealth transferexpenses, costs of probate, and federal and state deathtaxes may all be applicable. By insuring two people atthe same time and only paying a death benefit upon thedeath of the surviving spouse, a last survivor contracttypically has very low cost rates."

The other dimension to a last survivor contract,Smith explains, is its ability to harness the power oftax-deferred compounding of policy cash values.Depending on how the life insurance contract is structured,it may be possible to access a significant portionof the policy cash values income tax-free by way of aloan. "Because of the loan provisions, these contractsare a very attractive vehicle for developing largeamounts of cash accumulation,"Smith says.

Foresight of Disability Coverage

Equally important as life insurance is disability coverage.Statistics show that the chances of a disabilitybetween ages 25 and 60 are much greater than thechances of dying. As Robert Paff, president of IntegratedBenefits Corp, points out, "You're most likely to surviveyour disability, but we haven't figured out a way for youto survive your death. Your greatest asset is your abilityto work. It drives everything else you do."

Most physicians recognize the importance of disabilityinsurance, says Michael Schaff, chair of the healthcare group at Wilentz, Goldman & Spitzer. They alsorecognize the tax treatment associated with it. If premiumsare paid with pretax money, any benefits receivedwill be subject to taxes. If premiums are paid with aftertaxmoney, the benefits received are tax-free.

Additionally, Schaff points out that there are severalconsiderations when it comes to disability insurance."Will it be used to fund a buyout if someone at the practiceis disabled, or is it disability income insurance thatwill start paying you income if you become disabled?"Schaff asks. "Both are important, but the more commonone is disability income insurance."

Another consideration, particularly for individualpractitioners or small group practices, is disability insurancefor office overhead expenses, more commonlyknown as business overhead expense insurance. "Itenables the practice to continue to pay key people andperhaps bring in a temporary associate while a physicianis out on disability,"Muenzberg says. "It helps keep apractice going by paying the expenses."

Limited benefit levels, however, have promptedphysicians to consider alternate insurance coverage as awraparound to their disability policies. These includecritical care insurance, indemnity long-term care insurance,and high-limit disability insurance, and they workdifferently than a regular individual disability policy.

MONY's Powell explains that with a critical careinsurance policy "the benefit is triggered if the insuredmeets one of a predefined list of critical care illnesses, suchas a requirement for angioplasty, or a heart attack. Thenit will pay the insured a one-time lump sum. It's not a traditionaldisability policy, but it fills a little bit of the gap."

Paff adds that physicians should be aware of portabilityand conversion options. "Many doctors are leftpotentially uninsurable because their advisors did nottell them about portability options when leaving theircurrent employers,"Paff says. "Because of this potentialexposure to blind spots, we counsel people when theytransition out of their current positions and help themease into new ones."

Medical Malpractice Policies

Medical malpractice insurance is a necessary evil. It'sextremely costly, but it's also critical to have. "It's a seller'smarket from the insurance company standpoint,"Muenzberg says. "There are not a lot of alternatives, andthe prices continue to go up. Unfortunately, I don't seethe market changing in the near future."

It's not surprising that premiums are considerablymore expensive for surgical and specialty physician classes.Muenzberg's advice, however, is to purchase the highestlimit that is available. He explains that most companiesthat are still writing medical malpractice insurancestart coverage at $1 million per doctor per claim. Thecost to bump the coverage to $2 million is incremental,he says, typically 25% more of the annual premium.

"Some physicians think that all they're doing by carryinga higher limit of liability is putting a bigger price tagon a claim,"Muenzberg says. "It certainly comes into theconversation during discovery, but a higher percentage ofclaims are going for higher payouts. I think that for anextra 25% charge it's certainly advisable to carry a higherlimit of liability. Think of it as peace of mind."

Schaff says a lot depends on a physician's risk tolerance.Physicians recognize that by lowering their coveragefrom $3 million to $1.3 million they're going to savemoney in premiums. What they're asking, Schaff says, iswhether doing so will prompt a plaintiff's attorney toonly go after the policy limit.

"What I tell physicians is that if there's a case thatwarrants more than $1.3 million and they don't have it,that's where their risk comes in,"Schaff explains. That'srisk tolerance. If there was a reason why you had $3 millionbefore and you want to reduce it to $1.3 million,you have to recognize that you're saving money, but nowyou have additional risk."

It used to be that surgical and specialty physicianswere more concerned about higher coverage limits.And while specialties like obstetrics and gynecology,orthopedics, and general surgeons are still exposed togreater risk on a per-claim basis, the trend in the past10 years, Muenzberg says, has been higher awardsagainst the gatekeeper class, such as family practitionersand pediatricians.

"They have that directing-of-care exposure—notordering the right tests or not pushing hard enoughwith insurance companies to get certain procedurescovered,"Muenzberg explains. "That's something thatin the past 10 years more family practice doctors arebeing exposed to. And insurance premiums are considerablylower for those categories of physicians, so allthe more reason to up the coverage limit to whateverthe maximum is that's available."